Correlation Between Inspire Medical and Establishment Labs

Can any of the company-specific risk be diversified away by investing in both Inspire Medical and Establishment Labs at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Inspire Medical and Establishment Labs into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Inspire Medical Systems and Establishment Labs Holdings, you can compare the effects of market volatilities on Inspire Medical and Establishment Labs and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Inspire Medical with a short position of Establishment Labs. Check out your portfolio center. Please also check ongoing floating volatility patterns of Inspire Medical and Establishment Labs.

Diversification Opportunities for Inspire Medical and Establishment Labs

0.46

Correlation Coefficient

Inspire Medical  Establishment Labs

Very weak diversification

The 3 months correlation between Inspire and Establishment is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding Inspire Medical Systems and Establishment Labs Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Establishment Labs and Inspire Medical is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Inspire Medical Systems are associated (or correlated) with Establishment Labs. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Establishment Labs has no effect on the direction of Inspire Medical i.e., Inspire Medical and Establishment Labs go up and down completely randomly.

Pair Corralation between Inspire Medical and Establishment Labs

Given the investment horizon of 90 days Inspire Medical is expected to generate 1.95 times less return on investment than Establishment Labs. But when comparing it to its historical volatility, Inspire Medical Systems is 1.79 times less risky than Establishment Labs. It trades about 0.01 of its potential returns per unit of risk. Establishment Labs Holdings is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  4,600  in Establishment Labs Holdings on December 2, 2024 and sell it today you would lose (313.00) from holding Establishment Labs Holdings or give up 6.8% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

Inspire Medical Systems  vs.  Establishment Labs Holdings

Inspire Medical Systems

Risk-Adjusted Performance

Very Weak

Over the last 90 days Inspire Medical Systems has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, Inspire Medical is not utilizing all of its potentials. The current stock price agitation, may contribute to short-term losses for the retail investors.

Establishment Labs

Risk-Adjusted Performance

Very Weak

Over the last 90 days Establishment Labs Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Establishment Labs is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Inspire Medical and Establishment Labs

The main advantage of trading using opposite Inspire Medical and Establishment Labs positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Inspire Medical position performs unexpectedly, Establishment Labs can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Establishment Labs will offset losses from the drop in Establishment Labs' long position.

The idea behind Inspire Medical Systems and Establishment Labs Holdings pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

Check out your portfolio center.

Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.